Warning signs for Maryland's slots program

If Maryland legislators are looking for a sign to tell them whether to support Gov. Martin O'Malley's plan to expand the state's gambling program to include a sixth casino, they got it this week when Penn National Gaming asked if it could give back a third of the slot machines at its Hollywood Casino in Perryville. That facility had been reeling since a new competitor,the Cordish Cos. Maryland Live, opened in June, and Penn National officials said having fewer machines would save them money and make the casino look a little less depressingly empty for those who still gamble there.

To be sure, there is no small amount of gamesmanship in the timing of Penn National's announcement. The company has much bigger interests at stake than its little casino in Perryville. Chief among its concerns is protecting its flagship operation at Charles Town, W.Va. That's why it spent millions in an unsuccessful attempt to block Maryland Live, and it's why a Penn National vice president said in a recent conference call with investors that the company "has no choice but to fight" against the expansion of gambling. Although Governor O'Malley's proposal includes the possibility that the new slots license could go to Rosecroft Raceway, which Penn National owns, the company has concluded, not without reason, that the skids are greased for a proposed gambling palace on the Potomac at the National Harbor development.

Still, the numbers don't lie, and it's clear that Hollywood Casino has seen a major drop in revenue since Maryland Live opened. Its gross revenue for July was down 32.4 percent compared to a year ago, a difference of $3.3 million. Maryland Lottery Director Stephen Martino said the difference is "probably largely competition from Maryland Live." Given what has happened to Hollywood Casino, which is 53 miles from Maryland Live, we can bet there will be a significant impact from the opening of the Baltimore casino, which would be 13 miles from Maryland Live, and no doubt even more from a National Harbor casino, 33 miles away and, crucially, much more convenient to the lucrative Washington and Northern Virginia markets.

But how much of an impact? Mr. Martino said of Perryville's woes, "how lasting the market correction will be remains to be seen. Whether it will be long-term, we don't have information enough to say."

What he didn't say, but what one could easily conclude, is this: If we don't yet have enough evidence to predict the long-term effect of Maryland Live on Hollywood Casino, then we certainly don't have any way of knowing the effect of the as-yet unbuilt Baltimore casino on Maryland Live or the casino in Perryville. And the impact of another casino inPrince George's Countyon any of the other three is speculation on top of speculation.

Mr. O'Malley has sought to account for that in his proposal by lowering the tax rates on most of the state's casinos. He would provide a 5 percentage point break on the state's 67 percent slots tax for Maryland Live and the Baltimore casino, provided they spend that money on marketing and capital improvements. The Prince George's casino, oddly, would be eligible for the same 62 percent tax rate with no strings attached — this despite a recent statement from the prospective operator of the National Harbor casino, MGM, that it could live with the existing 67 percent rate.

The governor's legislation does include a mechanism for further adjustments to the tax rate if the facts warrant, but the details of his proposal leave something to be desired. The Baltimore and Maryland Live casinos could petition a newly beefed up state lottery commission for an additional break of up to 5 percentage points, and the commission is charged with making a recommendation on whether or how much to give them by Jan. 1, 2015. The new rate wouldn't go into effect until July 1, 2016, so the General Assembly would have two regular sessions in which it could overturn the recommendation.

That's an improvement over the idea of determining the future tax rates right now. The problem is, it still doesn't allow the rates to be set based on actual information about the impact of a Prince George's casino — the legislation stipulates that it would not be allowed to open before July 1, 2016, and the commission's power to set the tax rates is a one-time deal. Furthermore, whether an adjustment of 5 percentage points would be sufficient compensation to keep the Baltimore and Anne Arundel facilities viable is impossible to know.

Legislators can make productive use of their return trip to Annapolis this week to remove restrictions on hours of operation, free food and drink and casino-based entertainment. They can ban campaign contributions from gambling interests. (One wonders where we would be today had Mr. O'Malley included that provision in his initial slots bill five years ago.) And lawmakers can make the casino operators rather than the state responsible for purchasing the machines, a move that would net the treasury tens of millions a year. But they should resist the push to expand the state's gambling program before the existing one has had a chance to develop.